U.S. Oil Industry Fears That New Regulation Could Cost $25B

The Obama administration unveiled new regulations on offshore drilling on Thursday, rules that were several years in the making.

The regulations stem from the 2010 Deepwater Horizon disaster in the Gulf of Mexico, a well blowout that resulted in the death of 11 workers and one of the worst environmental disasters in U.S. history. The regulations call for new well-control measures, limits the volume of fluids that can be injected into wells, and requires heightened well monitoring. Related: 70-90% Decline In Well Completions Raises Hope For Oil & Gas

The oil industry pushed back against the rules, arguing that they will impose billions of dollars in new costs at a time when the industry can ill-afford them. ExxonMobil, Chevron, Anadarko and other companies have lobbied against the regulations, leading regulators to soften some requirements in the final rules compared to the original proposal from last year.

The U.S. Chemical Safety Board, an independent federal agency, said in an April 13 report that all of the regulations imposed by the Obama administration in the aftermath of the 2010 blowout and oil spill “do not go far enough to ensure effective industry management and control of major hazards or prevent possible future Macondo-type incidents.” In fact, the agency notes, many of the measures that BP and Transocean had in place before the disaster would satisfy many of the rules established after 2010. Related: The Great Glut: Why LNG Markets Might Not Balance Before 2025

The new rules from BSEE, however, would require more tests of the blowout preventers, the equipment used to shut off a well as a last resort. The regulations also require drillers to balance the injection of drilling fluids with well pressure, with the intention preventing operators from pushing well pressure too high.

ExxonMobil and other companies say the rules will impose costs as high as $25 billion over the next decade, pushing many offshore projects into unprofitably territory. Wood Mackenzie says the rules could reduce Gulf of Mexico spending by 70 percent. But the Bureau of Safety and Environmental Enforcement (BSEE) says that the rules will cost just $1 billion across the industry over ten years, and in any case, the rules are crucial to avoiding another disaster.

I would like to see analysis from professional, but independent, risk analysts about deep-water oil extraction.

The new federal rules for bringing up crude from thousands of feet below the surface, under unusually high pressure (the weight of a school bus per square-inch) is inherently risky. Will new techno-fixes and inspections contain the risk?

Maybe we need to look for new energy from above ground, instead of below? Old-style energy for burning up is simply looking less and less viable -- despite what new industry regulation implies. Really, how much protection is in these regulations? And will industry assume full responsibility for major accidents, as part of their cost of doing business?

Oil operators too big to fail? What cost to extract? And what cost for us to burn precious petroleum?